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Banking

Regulation: Shadow banks slip through the net

Global regulators are pumping out new rules to address potential systemic risk within the shadow banking system, with money-market funds and repo in the firing line. While governments and central banks continue to offer underhand guarantees to non-bank credit intermediation, however, the moral hazard associated with the shadow sector is unlikely to go away.

Although it is generally agreed that the term shadow banking refers to the credit intermediation that happens outside of the regulated banking sector, global regulators have only recently emerged from a two-year effort to get to grips with what that means in practice and why it is of concern. Towards that goal, a lot of brainpower has gone into understanding the distinction between non-bank entities and their activities, and how a regulatory focus on the former might incentivize banks to outsource the latter to entities beyond the macro-prudential perimeter.

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